SEC: The FEMA of Finance

Right after Hurricane Katrina devastated New Orleans and surrounding towns in 2005, as the Federal Emergency Management Agency (FEMA) serially fumbled every aspect of their responsibilities, and as it was revealed that FEMA administrator Michael D. “Brownie” Brown possessed no qualifications to warrant being in such a position of authority (unless being a Commissioner for the International Arabian Horse Association counts for something), I surmised that most US government agencies charged with oversight and regulation were equally lame as FEMA – we just would never know it until they faced a crisis that would reveal their incompetence.

At the time the example I most often cited in conversations was the Securities and Exchange Commission (SEC), the regulator of Wall Street’s shenanigans. Based solely on my instinct that government agencies were incompetent by design (after all, Reagan and his political heirs never missed an opportunity to excoriate government as the problem, and then bent over backwards to make sure that remained the status quo by installing into leadership positions idiots and agents hostile to the institution they would run), I was quite confident that SEC flunkies were blindly pushing papers while the far smarter quantitative analysts and traders duped them. Then when the Bernie Madoff scandal blew up in 2008 it proved my instincts correct. Although the SEC had been repeatedly warned over the course of ten years, the somnambulant regulators ignored the compelling evidence, allowing thousands of investors to lose more than $50 billion, and indirectly costing the life of at least one fund manager, Thierry de la Villehuchet who slit his wrists after investing and losing hundreds of millions of Old Europe money including $55 million of his personal fortune.

I doubt a better case has been made against the SEC than Harry Markopolos’s recounting of the sordid Bernie Madoff scandal, “No One Would Listen: A True Financial Thriller.” I decided to read the book after running into Markopolos’ parents at a Kentucky Derby party at the Erie Yacht Club, and recalling that their son had become famous for “blowing the whistle on Madoff.” That is somewhat misleading because it implies that Markopolos was responsible for bringing down Madoff, when in fact Madoff collapsed all by himself under the weight of his long-running Ponzi scheme, which like all such pyramid scams must eventually fail publicly – and painfully for those who hung along for the ride. But as he states in the title, “no one would listen.” That’s also a bit misleading, for Markopolos recounts how he informed any number of regulators and fellow travelers in the world of complex financial instruments of Madoff’s alleged fraud, and that many listened and agreed something seemed amiss, but as long as money was being made no one cared. That might have been the more accurate title: “No One Cared.”

Regardless, the book is a devastating tale of arrogance, entitlement, incompetence, petulance – and that’s just the part about the SEC. For a decade starting in the late 1990s after fairly easily determining Madoff was perpetrating some kind of fraud (front-running most likely, but perhaps even running a Ponzi scheme which seemed impossible to anyone who would listen given the man’s impeccable pedigree on the Street and in the Synagogue), Markopolos and a small team of fellow Wall Streeters continued to build out an incontrovertible case, only to be rebuffed by everyone they encountered. Not just the SEC, but hedge fund managers, feeder fund managers, even The Wall Street Journal, which, had they jumped on the story, could have clinched a Pulitzer Prize out of it.

It’s clear that Markopolos’s motivation for continuing to investigate and evangelize year after disappointing year slowly morphed from bringing down Bernie Madoff to embarrassing the SEC. He wanted the SEC to repent for their sins and change the way they did “business,” but the reader may also get the sense that Harry wanted revenge. The SEC blew him off and treated him like they would a lowly, disgruntled employee greedy for a payout. But after reading the tale, I couldn’t blame him. As a taxpayer, I too wanted revenge.

Today it seems that you can’t turn over a rock without finding yet another obscure government agency charged with important duties that is unfortunately staffed by people unqualified to work in the industries they regulate, led by incompetent cronies and political donors. I’m talking about you FBI (9/11), NASA (Challenger), Army Corp of Engineers (New Orleans), ATF (Fast and Furious), ICE (Boston Bomber).

Do you doubt that right now in Federal offices in Washington, DC and around the country, no one is listening?

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Sidebar: Harry Markopolos and I went to the same high school in Erie, PA – Cathedral Preparatory School. He graduated a year before me, although I didn’t know him. Early in the book he describes a stunt he pulled at Prep – donating two bars of dog soap to a communal inventory destined to be used by students after gym class – and the subsequent punishment. Markopolos writes, referring to his unnamed teacher, “’Come here, Meathead,’ he commanded. He grabbed a thick textbook and beat me with it until I went down.” I can confirm the veracity of this account, for I too was the recipient of the same treatment. I bet the perpetrator Markopolos declined to name was Mr. Pikiewicz – a Napoleonic tyrant who taught Driver Ed and Health.